Fed’s Lacker On Economic Outlook

Jeffrey M. Lacker President, Federal Reserve Bank of Richmond, in his speech Tuesday at the National Economic Club In Washington D.C. – made, what I thought to be, given the current economic conditions – some very concise and interesting assessments in relation to the overall state of the economy:

Before beginning his speech, he reminded his audience that the usual disclaimer applies: “The views I express, he said – are my own and are not necessarily shared by any of my colleagues on the Federal Open Market Committee”. (Note: Fed Lacker isn’t a voting member of the FOMC for the current year)

He then proceeded with the opening economic views of his speech where the boom and the fall of the housing market became the focal point. These following segments caught my eye.

I think it’s fair to say that a deterioration in the housing market of the magnitude we’ve seen was not assigned much probability by most borrowers, lenders and investors, even if many observers argue, in retrospect, that it should have been foreseen.
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Most observers are very hesitant about calling a bottom in housing construction, sales or prices, a hesitancy that I share. And even if housing market activity does manage to bottom out later this year, it is likely that any recovery would be exceedingly slow.

Once he exhausted his remarks about the housing sector, Fed Lacker then directed his attention toward the current state of the economy. He pointed out that….

…Motor vehicle assemblies have fallen 21 percent this year. That’s a stringent dose of bad news. But a couple of other demand components have provided somewhat brighter news of late. Exports added a full percentage point to real GDP growth in 2006 and 2007 and are likely to make a healthy contribution to growth this year as well.
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We also have seen surprising indicators of firmness in business investment. Many of us had expected to see a contraction in commercial construction by now, but since the beginning of the year private nonresidential construction has increased by more than 5 ½ percent.
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Business spending on equipment and software this year has also been firmer than I had anticipated.
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Putting the bad news together with the good, the story that emerges is of an economy that is growing at only a tepid pace overall.
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Earlier this year, many observers extrapolated this slowdown into an outright decline in economic activity and concluded that the economy was in or about to enter a recession.
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But the data we’ve seen since then have not yet shown the sharp, widespread reversals that define a recession. While the risk of an acute near-term downturn has not entirely disappeared, it has diminished substantially.
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On the whole, then, I expect growth to be positive, but quite modest for the rest of this year, and to gradually pick up over the course of next year.
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Although the downside risks to growth are by no means negligible, they have diminished significantly to my mind since the beginning of the year.

Lacker then directed his attention toward the topic of inflation:

While the growth outlook has improved since the beginning of the year, the inflation outlook has deteriorated. The latest figures confirm that inflation is unacceptably high.
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There are no signs yet of a wage-price spiral, in which wages accelerate in a futile attempt to stay ahead of accelerating prices. In fact, gains in overall compensation have been remarkably stable over the last couple of years.
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The apparent stability of inflation expectations does not justify complacency, however. Those expectations depend critically on confidence in how the Fed will tend to react to incoming data.

In conclusion to his speech, Fed Lacker stressed the aspect of interest rates. He pointed out that: “Part of the rationale for the speed with which the FOMC brought down the funds rate was the risk that the slowdown we are experiencing would prove to be more severe.

While that uncertainty has not entirely disappeared, my sense is that such downside risks have diminished appreciably. And just as easing policy aggressively in response to emerging downside risks made sense, withdrawing some of that stimulus as those risks diminish makes eminent sense as well”.

Following his speech Lacker added: [Via WSJ]:
It is “tempting” for policymakers to wait until there is a “fair amount” of certainty on the economy before raising rates. However, it is easy to make the “mistake” of waiting too long.